Governments Save Money Using Managed Competition

Governments reduce costs by letting the public and private sectors compete for the same contracts.

In many instances, the public and private sectors collaborate to provide a function or service — data centers, Web portals or internal systems. But in a few places, they compete in an effort to boost efficiency and improve service.

Through a process called managed competition, some jurisdictions allow companies to compete with government departments for bids to provide things like facilities, administrative or street maintenance services. The competition is “managed” by a government that sets parameters for internal departments and agencies to meet if they want to win a contract.

“One benefit that we have noted [is] reduced customer cost,” said John Trujillo, assistant director of solid waste for the Phoenix Public Works Department, which has used managed competition for three decades.

“There’s increased efficiency and effectiveness,” he said. “It creates a competitive environment with our staff and the private sector. It’s increased public confidence because they know they’re going to get the best benefit at the lowest cost.”

The solid waste division serves 1.5 million Phoenix residents. According to Trujillo, the city started the competitive bid process in 1979 during tough economic times. Private firms approached the City Council, promising that Phoenix could save money by awarding contracts to them, but the council created a managed competition process instead of privatizing services. Ever since, companies have had to compete with government to see which group could provide the most appropriate solid waste services for the lowest cost.

“Our areas are broken into 10 areas throughout the city, and every two years we bid out one area, and the contract term is six years,” Trujillo said. “Depending on the area, it’s anywhere from 30,000 to 60,000 homes that are competed against for the different service areas.”

This means it’s possible for the city to serve one area, while another is served by a private company — although the city government currently handles 100 percent of the trash collection services. The city is exploring managed competition in other areas, Trujillo added.

“Within the period we’ve been doing this, we’ve saved our residents about $38 million with this process,” he said, speaking of savings within the solid waste division.

Drawbacks and Responsibilities

The process has its drawbacks, however. For instance, citizens ultimately hold the city responsible for trash collection, no matter who’s performing the service.

“If there’s a complaint or something happens with that private area, the calls come into our call center,” Trujillo said.

Agencies also must deal with low staff morale and potential layoffs if they’re on the losing end of the competition. “If we lose a bid, we lose employees, so we have to work around that process as we go through it,” Trujillo said.

That possibility could endanger some San Diego jobs when managed competition gets under way. Voters approved the process in 2006, but it never started because of years of political disagreements and failed negotiations. Not all city officials wanted the competition, and those who supported it couldn’t reach an agreement with labor unions on how to implement the process.

San Diego finally created an official managed competition guide in 2010 after reaching an agreement with members of the Municipal Employees Association, a union for local white-collar workers; and the American Federation of State, County and Municipal Employees Local 127, a union for blue-collar workers.

“I think managed competition means different things to different people, and for a lot of people, it really means outsourcing and privatization — and outsourcing and privatization are both concepts and practices that we specifically oppose,” said Mike Zucchet, general manager of the Municipal Employees Association. “Managed competition is supposed to be a more level analysis of who can provide the service the best, [the] cheapest and preserve the public service.”

With the guide in place, bidding companies must provide a savings of at least 10 percent against bids submitted by the city. However, the companies don’t have to include health-care costs.

According to local news outlets, San Diego Mayor Jerry Sanders, who’s long supported managed competition adoption, met with the City Council last December to build support for a specific managed competition plan. Sanders announced a month later that functions such as street sweeping and street and sidewalk repair would be open to private-sector bids.

Photo: San Diego Mayor Jerry Sanders announced Jan. 13 that the private sector would be allowed to compete to provide the city with street sweeping, street and sidewalk maintenance and public utilities.

“We’re in the process of seeking bids on our fleet maintenance services,” said Alex Roth, a spokesman for the mayor. “We’re also seeking bids for our publishing services — they handle a lot of photocopying, and they do graphic work for different city departments.”

Roth thinks managed competition is a good option because cities are broke, and they must do something. San Diego has had to “brown out” fire stations and cut other services to adjust to the financial climate.

“We just do not have money anymore, so we’re looking for any and all ways to cut costs, and managed competition is high on the mayor’s list of sensible ways to go about that,” Roth said. “If we don’t save money this way, we’re going to cut services in some other way, and whether that means laying off cops and firefighters or cutting back on our 911 services, or closing libraries and rec centers — we have to find the money somewhere.”

He estimated that $300 million has been cut from the city’s budget since 2007, and more cuts are coming. In his December appeal to the City Council, Sanders said bidding out San Diego’s $37 million IT operations could save $10 million. He said a small portion of the operations were on bid earlier in 2010, which resulted in $1.2 million in savings.

But cost savings could be mitigated by how much the city must spend to oversee contractors, said Erik Bruvold, president of the National University Systems Institute for Policy Research. He examined the managed competition impact in various jurisdictions in a 2007 study, Streamlining San Diego.

“People have argued that any savings will be washed out by monitoring costs that are required of the government to observe whether the contractor is performing,” Bruvold said.

Managing the Benefits

San Diego’s mayor intends for public-private competition to spark innovation.

“You’re inevitably going to get good ideas on many ways things can be done differently and better,” Roth said. “I think whenever you get outside agencies looking at a department and the way things are run, you’re going to wind up getting insights into ways things can be improved.”

Phoenix uses a point system to measure the performance of city refuse collection. The contracted firms and government agencies are judged by collection misses, unacceptable material loads, mixed loads, and vehicle leaks and spills.

“We assess points and then re-rate the performance of the contracted firm and their particular bidder, and the contractor firm could be a private firm or it could be us, so we’re measured right alongside the private sector as well,” Trujillo said.

The standards ensure that providers are doing their best and aim to stave off complaint calls from unhappy citizens. They also help government providers better compete against private-sector rivals when a new contract bid opens up.

“Anytime you bring in competition, a couple of things are going to happen: You’re going to get lower prices for the service, generally speaking, and potentially higher quality,” said Steve Francis, who founded the San Diego Institute for Policy Research in 2006.

In 2007, soon after the city approved managed competition, the institute partnered with the Reason Foundation, a libertarian public policy think tank, to produce the Streamlining San Diego report.

Francis, who ran for San Diego mayor in 2005 and 2008, thinks the injection of business into government is good, but managed competition should be practiced intelligently.

“It doesn’t mean it can replace everything, but you should at least start picking up the low-hanging fruit first,” he said. “Then go from there and get the system going of evaluating the various government departments and putting together specs.”

Both he and Bruvold agree that managed competition would be ill-suited for police and fire operations.

“You have to be careful because you’re dealing with very sensitive information, and you’re dealing with public safety and people’s lives,” Francis said. “So I think in that case, those things have to be somewhat run by the government.”